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How to Profit From a Gold-Stock Rally

By Matt Badiali, editor, Stansberry Resource Report
Wednesday, September 16, 2015

It's nearly time to buy gold stocks.
 
As I've shown you in these pages before, sentiment toward the metal is terrible – which points toward a bottom. World banks are also printing massive amounts of money. That means it will take more and more paper money to buy gold. And many miners are great values today.
 
There's also a shift happening in the market...
 
While gold prices plunged over the past few years, stock prices soared. The price of gold is down around 40% from its September 2011 peak. Meanwhile, the S&P 500 is up more than 70% from its October 2011 bottom.
 
But now, stock prices are falling. The S&P 500 has lost 6% of its value in the past month. Meanwhile, gold prices have remained flat. If stocks continue their decline – which many analysts think is likely – investors will move into hard assets like gold as part of an "insurance portfolio."
 
In short, gold stocks could soon break out. But if you're going to invest in the sector, make sure you buy the right gold stocks. If you buy the wrong ones, you could lose a lot of money. That's why we're doing the homework for you. So when the uptrend comes, you'll know which ones to buy...
 
As longtime Growth Stock Wire readers know, mining gold is an expensive process. And with high production costs and low gold prices, many miners are struggling. Some mines have even become unprofitable as production costs outpaced gold prices.
 
To see how healthy a company is in today's low-gold-price environment, you want to look at its "all-in sustaining costs" (AISC). That shows us just how much money the company needs, per ounce of gold, to operate. It includes mining costs, administration costs, and exploration costs.
 
You can then compare this number with the average gold price over the past 12 months to get these companies' profit margins.
 
The table below shows 12 major mining companies with their market capitalizations, AISCs, and profit margins.
 
Company
Market Cap
AISC
Profit Margin*
Goldcorp
$10.5 billion
$846
29%
Newmont Mining
$8.6 billion
$909
23%
Barrick Gold
$7.4 billion
$895
25%
Agnico Eagle Mines
$4.8 billion
$864
27%
AngloGold Ashanti
$3.0 billion
$899
24%
Gold Fields
$2.1 billion
$1,029
13%
Eldorado Gold
$2.0 billion
$900
24%
Kinross Gold
$1.7 billion
$1,006
15%
Yamana Gold
$1.5 billion
$896
25%
Centerra Gold
$1.5 billion
$937
21%
Iamgold
$0.6 billion
$1,076
9%
Harmony Gold Mining
$0.3 billion
$1,233
-4%
Source: Datastream, SNL Mining and Metals
* Using 12-month average gold price

As you can see, Harmony Gold Mining isn't making any money. It's essentially the walking dead. Unless Harmony Gold cuts costs or gold jumps in price, we could see the company go bankrupt.
 
Iamgold isn't doing much better. A single-digit profit margin is like a man in a life jacket in the middle of the Pacific Ocean. He may survive for a while, but I don't like his chances for the long run.
 
The 12 gold miners above make up more than 43% of the Market Vectors Gold Miners Fund. This fund is the way most investors own gold miners. But Harmony Gold Mining and Iamgold make me less inclined to own this particular basket of stocks.
 
However, companies like Goldcorp, Agnico Eagle Mines, Barrick Gold, and Yamana Gold are doing OK. They've made cuts to allow them to survive the current gold-price environment.
 
To sum up, instead of just buying a basket of gold stocks, you should be far more selective. Focus on lower-cost producers like the companies above. Gold-royalty companies like Royal Gold and Franco-Nevada are also a better way to invest in gold stocks when the time is right.
 
Good investing,
 
Matt Badiali




Further Reading:

"Finding, building, and operating a mine – and making a profit – is tough," Matt writes. "But as my longtime readers know, there's a way to profit off gold and silver mines without taking on all that risk..." Learn more here: The Best Precious-Metals "Mining" Stocks in the World.
 
If you plan to invest one dime in natural resources, this classic interview with master resource investor Rick Rule is a must-read. In it, he reveals everything you need to know to master the resource market's cyclicality. If you catch one of these big cycles at the wrong time, you can lose a fortune. But if you catch one early, you may never have to work again...

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Market Notes
Capital-efficient video-game maker Activision Blizzard reaches a new 52-week high.
 
Chemical company DuPont sinks to a new 52-week low... down 35% in 2015.
 
Telecom giant Sprint soars 27% over the past month.
 
Sugar prices move higher... up 8% in September.
From The Crux
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1975.55 +1.2% -0.4%
Oil (USO) 14.51 +0.8% -58.0%
Gold (GLD) 105.78 -0.4% -10.8%
Silver (SLV) 13.71 -0.6% -23.5%
U.S. Dollar 95.63 +0.4% +13.5%
Euro 1.13 -0.1% -12.7%
Volatility (^VIX) 22.36 -7.8% +58.4%
Gold Stocks (^HUI) 105.67 +0.4% -51.8%
10-Year Yield 2.26 +3.7% -12.7%

World ETFs
Symbol Price
Change
52-Wk
Israel (ISL) 18.73 +1.2% +10.0%
Japan (EWJ) 11.79 +0.7% +1.0%
USA (SPY) 198.53 +1.3% +1.7%
India (IFN) 24.26 +0.1% -4.3%
China (FXI) 36.42 +1.2% -8.2%
Taiwan (EWT) 13.73 +0.9% -12.1%
S. Africa (EZA) 55.46 +0.9% -16.4%
Singapore (EWS) 10.55 +0.6% -19.7%
Russia (TRF) 9.97 +0.9% -21.2%
S. Korea (EWY) 48.76 +1.2% -22.3%
Canada (EWC) 23.40 +0.7% -25.8%
Lat.America (ILF) 23.71 +0.2% -39.6%

Sector ETFs
Symbol Price
Change
52-Wk
Biotech (PBE) 55.51 +1.1% +22.4%
Software (PSJ) 41.52 +0.7% +15.2%
Health Care (IYH) 152.41 +1.3% +15.1%
Retail (PMR) 38.27 +0.3% +13.2%
Consumer Svcs (IYC) 142.21 +0.9% +13.7%
Construction (PKB) 24.54 +0.7% +12.6%
Big Tech (QQQ) 106.56 +1.2% +9.3%
Defense (PPA) 34.40 +1.1% +5.8%
Semis (PSI) 24.20 +1.0% +7.3%
Insurance (IAK) 49.68 +1.2% +5.0%
Financials (IYF) 86.49 +1.4% +3.5%
Utilities (XLU) 41.90 +0.6% +2.3%
Real Estate (IYR) 70.52 +0.7% +3.1%
Industrials (IYJ) 100.62 +1.5% -1.0%
Media (PBS) 24.47 +1.2% -2.3%
Transportation (IYT) 146.45 +1.5% -3.4%
Telecom (IYZ) 28.62 +1.3% -3.6%
Water (PHO) 21.77 +0.9% -13.9%
Basic Mat (IYM) 68.64 +0.9% -19.9%
Alt. Energy (PBW) 4.40 +0.9% -33.4%